An unsecured car loan works in much the same way as a traditional personal loan: a lump sum is lent in return for you agreeing to make regular repayments, usually by direct debit. It's repayable over a specified period, usually between six months and 5 years. Security will usually be needed for loans of a large amount.

Lenders charge interest on the amount borrowed. The interest rate is usually fixed at the start of the loan, which means that the repayments remain the same throughout the term.

The interest charge is shown as an APR (Annual Percentage Rate). Any firm that lends money is required by law to quote the APR, and to offer this advertised rate to 51% of borrowers. The APR usually depends on the amount of the loan and sometimes the term as well, although some lenders do offer the same rate to all their borrowers.

It's important to check the best rate dependent on the amount and term you are after.

Read our guides on personal loans for a more in-depth overview of the things you need to consider when taking out an unsecured card loan, including:

Representative APR

You may not always get the advertised representative APR, as the rate you're given will depend on your credit rating, a scoring system used by lenders to determine how creditworthy an applicant is.

Personal loan early settlement penalties

Paying off your loan early can save you hundreds of pounds in interest, but some lenders apply penalties to customers wishing to repay the full amount before the end of the term. If you are refinancing, you should take this penalty into consideration.

Personal loan deferment periods and payment breaks

Many lenders will allow a break between when you receive your loan and when the first payment needs to be made, beyond the standard month. While this gives you a break from payments, interest is charged over this period, which increases the total interest payable. Lenders may also offer breaks during the loan term, but again interest is charged on the amount not paid. This means a larger loan amount is left unpaid for longer. These breaks may incur charges.

Direct debits

Most lenders need a direct debit to pay the monthly instalments. Make sure that your bank account can accept these and ensure that the money is available for payments. Penalty charges for missed payments can be high.

Payment protection insurance for unsecured loans

This is an optional insurance that will cover your repayments should you be unable to work under certain circumstances and can include:

Unemployment

Accident

Sickness

Death.

It is important to check the small print to ensure the cover provided is suitable for your needs.

Pros and cons of unsecured car loans

A wide variety of products, giving you lots of choice as to the best deal for you.

With an unsecured car loan, you are not putting your home at risk should there be problems with repayment.

Paying by direct debit is easy and a convenient way to keep up with repayments.

Unsecured car loans only allow you to borrow up to £25,000, so expensive car purchases will have to be funded with a secured car loan (where the lender can repossess the car if you don’t keep up repayments).

Moneyfacts tip

Moneyfacts tip

Pay attention to the APR of the unsecured car deal you are looking at – the higher the interest rate, the more you will have to pay in total.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

At a glance

An unsecured car loan is a personal loan offered solely for the purchase of a vehicle.

The loan will usually come with additional benefits such as discounted vehicle inspections, car parts, breakdown cover, etc.

Unsecured personal loans – and therefore car loans – are usually covered by the terms of the Consumer Credit Act.